26 June 2009

The Particularity of Japan from an Economic and Demographic Perspective

Since Japan is so often, and as we think incorrectly, cited as a likely deflationary pattern for the US in monetary outcomes, and since so few who discuss this subject have an understanding of Japanese culture and social structures, I thought it would be timely to point out a basic fact that should be reasonably well known but is so often overlooked.

Japanese population growth is flat, and the percent of the population that is no longer economically productive is growing rather quickly.

So would we be so suprised that Japan's GDP is flat, and that their money supply growth is sluggish? One should not be, unless they are not bothering to look at the data.

America also has an aging population as do many countries, but Japan is unique because of its extraordinarily low rates of immmigration due to the very homogenous nature of Japanese society.

Japanese population is now estimated at about 127.7 million people with a very nominal immigration rate of about 20,000 people per year and a negative birth-death rate.

When one mixes a negative native birth-death rate and very low immigration due to a rigid approach to race and citizenship, it should be no suprise that Japan has an unusually high level of elderly citizens.

The charts seem to suggest that countries with significantly aging populations with low population growth will experience a natural slow growth in GDP.

As you know we tend to like to view money supply growth and GDP in relation with each other and to per capita variables.

When one adds to this demographic mix the Japanese cultural bias to low domestic consumption and a high savings rate, and a bureacratic bias to a mercantilist industrial policy, the reasons for Japan's economic status become rather obvious.

I am not suggesting that Japan must change. I have spent many happy moments in Japan, and spent a great deal of time to learn the language and understand the culture, albeit with results inadequate to my hopes.

I have had many Japanese friends, and find great enjoyment in their art and music and social personality. I regret that I have not been to visit there in some years, and have forgotten so much and miss so many old acquantances. And I am particularly at a loss for their wonderful cuisine which I find fascinating, uniquely refreshing and delightful.

It is important to understand a country in its context, and with some attention to detail and its particulars, if one is going to perform an economic analyis and then perform broad comparisons and construct models.

Demographically speaking, Japan is an outlier with some unique characteristics. If one does not consider this, it can be a source of false conclusions.